NEW YORK |
NEW YORK (Reuters) – McGraw-Hill Cos Inc (MHP.N), agreeing to investor demands to “unlock shareholder value,” said on Monday it will divide itself into a markets data company that includes its Standard Poor’s ratings businesses and an education company for textbook publishing.
The breakup of the mini-conglomerate follows public demands starting in July from the Ontario Teacher’s Pension Fund and hedge fund Jana Partners LLC for a broad reorganization. The activists suggested breaking up the company into more than two pieces to highlight the value of its individual equities, commodities and financial analytics units.
“It’s a first step,” said Pat English, chief executive of Fiduciary Management Inc, a large holder of McGraw-Hill shares, who argues for a more radical plan.
“It doesn’t make sense to have SP Credit Ratings, SP Indices, Capital IQ, Platts and other information companies under one roof,” English wrote in an e-mail.
Investors boosted McGraw-Hill’s shares 1.1 percent in afternoon trading to $39.15 a share after it also said it will accelerate plans to complete $1 billion of share buybacks this year. The company has repurchased $541 million so far this year.
The stock, however, still trades far below the sum-of-the-parts estimates of more than $50 a share that several analysts forecast in July.
“We intend to review the scope and impact of these steps,” Jana and the Canadian pension fund said in a joint statement that noted they have identified additional ways “to unlock shareholder value.” Monday’s announcement is a start to “reversing years of underperformance,” they wrote.
Terry McGraw, the 63-year-old chairman and chief executive of the company founded by his great-grandfather, said he will lead the bigger and more profitable part of the reorganized company that will include the SP credit rating, market index and Capital IQ corporate and markets analytics businesses.
McGraw-Hill Markets, the working name for the business, also will include Platt’s, a commodities markets information company some analysts said on Monday is too profitable to be hidden with the other capital markets segments. Platt’s products have been in high demand amid the global boom and volatility in commodities.
In an interview, McGraw said the criticism was fair, but repeated comments from a conference call in which he termed the two-way split, “the very best thinking of this management team and the board of directors.”
The plan, which is expected to be put in place by the end of 2012, leaves several questions unanswered. McGraw said nothing about a succession plan and the company said it will start a search to find a CEO for McGraw-Hill Education. The textbook business is now run by Robert Bahash, 66, McGraw-Hill’s former chief financial officer who stepped into the role when an executive left last year.
The investment banks Goldman Sachs Group and Evercore Partners, which are advising on the spinoff, are still working on arrangements. Executives also have to devise a distribution plan for the shared costs of the markets and education businesses.
McGraw-Hill also must deal with several units that do not fit into the two-company structure. In June, it put a handful of television stations up for sale. Investors said other properties such as trade magazines covering the aviation and construction industries, are oddball holdings.
During a conference call with analysts, McGraw and other executives said the restructuring would “significantly” reduce the company’s $1 billion expense base, but declined to expand on how much savings would be realized.
McGraw said executives and directors waited to develop a reorganization plan until they were confident last year that regulatory pressure on its Standard Poor’s ratings business was beginning to subside after the 2008 financial crisis. The company, which jarred the global economy last month by downgrading the credit rating of the U.S. government, was criticized for giving “triple-A” credit ratings to complex securities filled with low-grade subprime-mortgages.
SP’s chief competitors, Moody’s Investors Service and Fitch Ratings, have not followed it in downgrading the United States.
The two-way break-up will be structured as a tax-free spinoff of the education business the company said in a statement.
The markets businesses will have about $4 billion of revenue in 2011 and the education businesses will have about $2.4 billion in revenue, it said.
(Reporting by David Henry in New York, Jochelle Mendonca in Bangalore; editing by Sriraj Kalluvila, John Wallace and Andre Grenon)